Editor's Chair: The spanner in the works

Richard L. Hudson, Editor, Science|Business

Why bother? Take a quick look at the facts to see the magnitude of the problem. Science around the world is big business. In the industrialised world alone, more than $550 billion a year gets pumped into laboratories. The scientific sector employs more than 3 million full-time researchers, and provides the ideas behind new products and services in at least 40 per cent of global economic output.

Yet the supply of new scientists is faltering; in the physical sciences, enrollment in many countries is actually falling. There's a mammoth international imbalance in supply and demand, in both people and money. In the US, which outspends the world on R&D, 38 per cent of its technical workforce is foreign-born and its once-unassailable lead in technology trade is diminishing. In Europe, the world's scientific brain bank for the past century, great universities are starved and private investment scarce. In Asia, a dynamic India and China are rising - but despite the media attention, the economic fact remains that for the moment they are mainly exporters of talent and importers of technology. And all the while, the technological challenges to global human prosperity - flu pandemics, bioterrorism, global warming - are mounting.

So what should governments do?

1. Spend smarter.

It's classic economics that the role of government is to spend where the market won't or can't, for the public good. Basic research is in the public good; it’s the starting point for all new products and ideas that, 20 years down the road, create new industries and jobs.

But the market isn't working for basic research. Throughout the world, business spending on R&D - while up overall - is focusing ever more on the "D" rather than the "R". IBM repurposes its Nobel-winning labs to applications. Bell Labs is broken into pieces. The pharma giants spend more on marketing than research. Increasingly, all these companies lean on universities and public research institutions for their basic research. AstraZeneca in 2004 reported 270 research collaborations with universities. Microsoft spends 15 per cent of its huge and growing research budget on outside collaborators.

Yet what is happening at those universities and research institutions to which the companies now turn for basic research? Budget cuts and consolidation. Yes, it's good to force universities to seek outside income from industry; it facilitates technology transfer. And it’s good to force students to pay something for their own education; it makes them value it more and work harder. But those are both measures, now dominant in government policies, that operate only in the budgetary margins.

In the end, the main bill for education in a society rests with government. The market can't pay it, so the state must.

2. Tax less

Once a discovery is reported, it must be developed into a product or service – and that’s where the market, not government, should take the lead. Governments should not be subsidising development projects - especially of the Euro-pudding style with five universities, three companies and a gaggle of consultants. Instead, they should be providing the climate for companies and private investors to seek out, and support, those projects that the market wants and will pay for.

But the tax system in most European countries kills investor appetite. Capital gains taxes in Germany and France drive investment offshore. High social charges discourage university spin-offs from hiring the help they need to grow. This affects investment in all companies, in all sectors - not just bio start-ups or semiconductor spin-offs.

But in Europe, an especially critical problem is seed funding - the first stage of financing, when an idea is still new and wildly risky. Angel investors are critical to this stage, and the numbers speak volumes. According to one study at Harvard's Kennedy School, Europe has about 30 angels per million of the population. The US figure: 1,400.

Only by cutting taxes on capital gains and investment income, at least in early-stage R&D, will the population of angels grow. This isn't a matter of making rich people richer; it's about persuading more of the rich to invest their money here, in Europe, in technology. It's about getting more foreign companies to stop avoiding France, Germany or Sweden, despite their scientific strengths, simply because the tax system terrifies them. (And if you’re wondering where to find the money to fund these tax cuts, you could start with the 40 per cent of the EU budget that goes to agricultural subsidies.)